Banks must connect in order to enable faster, frictionless services. Photo: Peter Trimming
“It’s faster to send money overseas through a FedEx envelope than international wire.” —Ripple Labs Head of Business Development Patrick Griffin, speaking at the SAP Financial Services Forum in London, June 24, 2015.
It may be hard to believe, but this incredible comparison is a fact in the current state of money transfers worldwide. Fintech companies are scrambling now to reimagine the process by which funds are transferred across the globe. For another perspective on the way this vital change is taking place, Ripple Labs spoke with Mark Hartley in Manchester, UK.
As Chief Innovation Officer at Clear2Pay (which is now an FIS company) Mark Hartley has a great deal of perspective on the payments market in the UK and the larger world. Mark joins the voices of the financial industry quickly becoming a chorus declaring that the outdated siloed banking systems of the past are in their last days. We had a chance to catch up with Mark and ask him what he thought of larger trends in payments in 2015.
What are the biggest challenges financial institutions face? Where are the inefficiencies and unnecessary costs?
Certainly in the payments space, the biggest challenges financial institutions face have to do with the silos within banks. Many of them have built in payments infrastructure over the years with one department over high value transactions, another for ACH, another for international, and yet another for handling cards. All of them are different organizations with their own budgets and their own IT. All of this amounts to massive inefficiency. Most of these systems are old, and not even close to capable of operating in real time. This is legacy infrastructure; carrying forward from past procedures, whether they’re relevant or not. So, they’re all doing the same thing—moving money from one account to another— with their own rules. In the end, the cost of infrastructure equals the cost of transactions. Account to account transfers are centralized, passing through clearing infrastructure and into a settlement infrastructure. Like NACHA in the States, this process involves many steps and is expensive and slow. Because of this, a bank’s cost to income ratio around payments is appalling.
- See also: Cross-Border Payments with Ripple
What sort of innovation are we seeing in the space, either traditional or more transformative?
Most of the innovations we’ve seen in the payments industry in the last six years has been in the front end; products that make it easier for the customer like Square, Apple Pay, Starbucks Wallet, or Uber. These are all built on the existing payment rails, but none of this front-end innovation solve the underlying network problem. They just hide it. This creates a demand in the back end. In all other industries, we’ve come to expect satisfaction in real time, and the payment rails (especially ACH) settle overnight at best or in three days if you’re unlucky. The industry is just starting to move toward real-time payment and settlement. It’s happening in Australia, in Singapore, and now the Fed and the EU are moving toward this change. That’s the next frontier; not recreating the centralized model, but looking at technology like the Ripple protocol or the blockchain to decentralize, make banking more efficient, and reduce costs.
Where do we go from here?
Customer demand is pushing the agenda of real-time payment. The blockchain and the different manifestations of how it can be used is really where the focus and the funding will be for the next five years. One of the real shortfalls in the existing payments system is the lack of meaningful data that is shipped along with the payments. If I pay invoices from a supplier in the antiquated systems and send remittance with meaningful data like an invoice, that information is typically chopped off when it goes through. On the receiving end, they won’t know where the payment is meant to be applied, or which invoice is settled. This new technology can add extra meaningful information for reconciliation in the very same channel.